chapter 11 current liabilities and contingencies 11: current liabilities and contingencies copyright...

Copyright © 2017 Pearson Canada Inc.

11-1

Chapter 11

Current Liabilities and Contingencies

M. Problems

P11-1. Suggested solution:

Item Liability

Financial or non-financial

obligation? Explanation

1. Accounts payable F

2. Warranties payable N Obligation is to deliver

goods or services

3. USD bank loan F

4. Bank overdraft F

5. Sales tax payable N Obligation is not contractual

in nature

6. Notes payable F

7. Unearned revenue N Obligation is to deliver

goods or services

8. Finance lease obligation F

9. HST payable N Obligation is not contractual

in nature

10. Bank loan F

11. Bonds payable F

12. Obligation under customer

loyalty plan

N Obligation is to deliver

goods or services

13. Income taxes payable N Obligation is not contractual

in nature


To be classified as a liability, the item must: i) be a present obligation; ii) have arisen from a

past event; and iii) be expected to result in an outflow of economic benefits. This is an ―and‖

situation as all three criteria must be present before a liability is recorded. The precise amount

of the obligation need not be known, provided that a reliable estimate can be made of the

amount due. Provisions are liabilities in which there is some uncertainty as to the timing or

amount of payment.

ISM for Lo/Fisher, Intermediate Accounting, Vol. 2, Third Canadian Edition


11-2

Trade accounts payable meet the criteria of a liability as set out below:

* Present obligation: The debtor is presently contractually obliged to pay for goods or services

received.

* Past event: The trade payable arose from a good or service the debtor previously received or

consumed.

* Outflow of economic benefits: Trade payables are typically settled in cash—an outflow of

economic benefits.


a. Provisions are liabilities in which there is some uncertainty as to the timing or amount of

payment.

b. Financial liabilities are contracts to deliver cash or other financial assets to another party.

They differ from non-financial liabilities as the latter category is typically settled through the

provision of goods or services.

c. A non-exhaustive list of financial liabilities includes accounts payable; bank loans; notes

payable; bonds payable; and finance leases. A non-exhaustive list of non-financial

obligations includes warranties payable; unearned revenue; and income taxes payable.


a. The three broad categories of liabilities are:

1. Financial liabilities held for trading

2. Other financial liabilities

3. Non-financial liabilities

b.

* Held-for-trading liabilities are initially recognized at fair value.

* Other financial liabilities are initially reported at fair value minus the transaction costs

directly resulting from incurring the obligation.

* The initial measurement of non-financial liabilities depends on their nature. For instance,

warranties are recorded at management’s best estimate of the downstream cost of meeting

the entity’s contractual obligations, while prepaid magazine subscription revenue is

valued at the consideration initially received.

c.

* Held-for-trading liabilities are subsequently recognized at fair value.

* Other financial liabilities are subsequently measured at amortized cost using the effective

rate method.

* Non-financial liabilities are subsequently measured at the initial obligation less the

amount earned to date or satisfied to date through performance. For example, a publisher

that received $750 in advance for a three-year subscription and has delivered the

magazine for one year would report an obligation of $500 ($750 – $250).

Chapter 11: Current Liabilities and Contingencies


11-3


Item Liability Current or

non-

current

liability, or

potentially

both?

Explanation

1. Accounts payable C

2. Warranties payable B The obligation that is expected to be

settled within one year of the balance

sheet date is current, the balance non-

current

3. Deposits B The classification of the deposit as

current or non-current depends upon the

expected settlement date. If less than one

year after the balance sheet date, the

obligation is classified as current

4. Bank overdraft C

5. Sales tax payable C

6. Bank loan maturing in five

years was in default during the

year; before year-end, the

lender grants a grace period

that extends 12 months after

the balance sheet date

N The obligation is reported as a non-

current liability because the grace period

was granted before the balance sheet date

and extends twelve months after year-

end

7. Five-year term loan, amortized

payments are payable annually

B The principal portion of the payments

due within one year of the balance sheet

date are classified as current, the balance

as non-current

8. Unearned revenue B The classification of the obligation as

current or non-current depends upon

when revenue is the expected to be

recognized. If less than one year after the

balance sheet date, the obligation is

classified as current

9. Finance lease obligation B The principal portion of the payments

due within one year of the balance sheet

date are classified as current, the balance

as non-current

10. HST payable C

11. 90-day bank loan C

12. Bond payable that matures in

two years

N The obligation is reported as non-current

as the maturity date is two years after the

balance sheet date



11-4

13. Obligation under customer

loyalty plan

C Classified as current as the entity does

not have the unconditional right to defer

settlement for twelve months after the

reporting period.

14. Income taxes payable C

15. Bank loan that matures in five

years that is currently in

default

C

16. Three-year bank loan that

matures six months after the

balance sheet date

C


Summary journal entries

1. Dr. Inventory 10,000

Dr. HST recoverable ($10,000 × 14%) 1,400

Cr. Accounts payable ($10,000 + $1,400) 11,400

2. Dr. Equipment ($20,000 + $500) 20,500



3. Dr. Cash [$15,000 × (1 + 14%)] 17,100

Cr. Sales 15,000

Cr. HST payable ($15,000 × 14%) 2,100

Dr. Cost of goods sold ($15,000 x 50%) 7,500

Cr. Inventory 7,500

4. Dr. Accounts receivable [$20,000 × (1 + 14%)] 22,800

Cr. Sales 20,000

Cr. HST payable ($20,000 × 14%) 2,800


Cr. Inventory 10,000

5. Dr. Accounts payable 23,370

Cr. Cash 23,370

6. Dr. HST payable ($12,000 + $2,100 + $2,800) 16,900

Cr. HST recoverable ($8,000 + $1,400 + $2,870) 12,270

Cr. Cash ($16,900 – $12,270) 4,630



11-5






2. Dr. Equipment ($15,000 + $1,000) 16,000



3. Dr. Cash [$11,000 × (1 + 15%)] 12,650

Cr. Sales 11,000

Cr. HST payable ($11,000 × 15%) 1,650


Cr. Inventory 8,800

4. Dr. Accounts receivable [$20,000 × (1 + 15%)] 23,000

Cr. Sales 20,000

Cr. HST payable ($20,000 × 15%) 3,000



5. Dr. Accounts payable 13,800

Cr. Cash 13,800

6. Dr. HST payable ($22,000 + $1,650 + $3,000) 26,650

Cr. HST recoverable ($20,000 + $1,800 + $2,400) 24,200

Cr. Cash ($26,650 – $24,200) 2,450



11-6



1. Dr. Inventory ($42,000 – $2,000) 40,000

Dr. GST recoverable ($40,000 × 5%) 2,000

Cr. Accounts payable [$40,000 × (1 + 5%)] 42,000

The purchase of inventory for resale is PST exempt.

2. Dr. Cash [$30,000 × (1 + 5% + 7%)] 33,600

Cr. Sales 30,000

Cr. GST payable ($30,000 × 5%) 1,500

Cr. PST payable ($30,000 × 7%) 2,100

Dr. Cost of goods sold ($30,000 × 2/3) 20,000


3. Dr. Accounts receivable [$60,000 × (1 + 5% + 7%)] 67,200

Cr. Sales 60,000

Cr. GST payable ($60,000 × 5%) 3,000

Cr. PST payable ($60,000 × 7%) 4,200

Dr. Cost of goods sold ($60,000 × 2/3) 40,000


4. Dr. GST payable ($20,000 + $1,500 + $3,000) 24,500

Dr. PST payable ( $22,000 + $2,100 + $4,200) 26,300

Cr. GST recoverable ($21,000 + $2,000) 23,000

Cr. Cash ($24,500 + $26,300 – $23,000) 27,800



11-7




Dr. GST recoverable ($30,000 × 5%) 1,500

Cr. Accounts payable [$30,000 × (1 + 5%)] 31,500

The purchase of inventory for resale is PST exempt.

2. Dr. Cash [$20,000 × (1 + 5% + 5%)] 22,000

Cr. Sales 20,000

Cr. GST payable ($20,000 × 5%) 1,000

Cr. PST payable ($20,000 × 5%) 1,000

Dr. Cost of goods sold ($20,000 × 75%) 15,000


3. Dr. Accounts receivable [$50,000 × (1 + 5% + 5%)] 55,000

Cr. Sales 50,000

Cr. GST payable ($50,000 × 5%) 2,500

Cr. PST payable ($50,000 × 5%) 2,500

Dr. Cost of goods sold ($50,000 × 75%) 37,500


4. Dr. GST payable ($18,000 + $1,000 + $2,500) 21,500

Dr. PST payable ( $14,000 + $1,000 + $2,500) 17,500

Cr. GST recoverable ($15,000 + $1,500) 16,500

Cr. Cash ($21,500 + $17,500 – $16,500) 22,500



11-8


Oct. 31,

2019

Dr. Retained earnings 30,000

Cr. Dividends payable on preferred shares

(10,000 sh × $1.00/sh × 2) + (5,000 sh × $2.00/sh)

30,000

The preferred shares B are non-cumulative in nature

and as such are not entitled to dividends for 2014 as

they were not declared.

Nov. 30,

2019

Dr. Retained earnings 50,000

Cr. Dividends payable on common shares

(100,000 sh × $0.50 sh)

50,000

Dec. 1,

2019

Dr. Dividends payable on preferred shares 30,000

Cr. Cash 30,000

Jan. 2, 2020 Dr. Dividends payable on common shares 50,000

Cr. Cash 50,000


Oct. 31, 2016 Dr. Retained earnings 175,000

Cr. Dividends payable on preferred shares

(50,000 sh × $2.00/sh) + (25,000 sh × $1.00/sh × 3)

175,000

The preferred shares A are non-cumulative in nature and

as such are not entitled to dividends for 2014 or 2015 as

they were not declared.

Nov. 30, 2016 Dr. Retained earnings 300,000

Cr. Common stock dividends distributable

(200,000 sh × 10%/sh × $15.00)

300,000

Dec. 1, 2016 Dr. Dividends payable on preferred shares 175,000

Cr. Cash 175,000

Jan. 2, 2017 Dr. Common stock dividends distributable 300,000

Cr. Common shares 300,000



11-9


Jan. 31 Dr. Franchise fee expense 2,500

Cr. Royalty fee payable

($50,000 × 5%)

2,500

Dr. Sales and marketing expense 1,250


($50,000 × 2.5%)

1,250

Feb. 15 Dr. Royalty fee payable 3,750

Cr. Cash

($2,500 + $1,250)

3,750

Feb. 28 Dr. Franchise fee expense 2,000


($40,000 × 5%)

2,000



($40,000 × 2.5%)

1,000

Mar. 15 Dr. Royalty fee payable 3,000

Cr. Cash

($2,000 + $1,000)

3,000

Mar. 31 Dr. Franchise fee expense 3,000


($60,000 × 5%)

3,000



($60,000 × 2.5%)

1,500

Apr. 15 Dr. Royalty fee payable 4,500

Cr. Cash

($3,000 + $1,500)

4,500



11-10


a. Jan. 1, 2016 Dr. Franchise agreement 30,000

Cr. Cash 30,000

Dec. 31, 2016 Dr. Amortization expense - franchise 3,000

Cr. Franchise agreement

($30,000/10 years)

3,000

Dec. 31, 2016 Dr. Royalty fee expense 59,500


($850,000 × 7%)

59,500

Dec. 31, 2016 Dr. Sales and marketing expense 17,000


($850,000 × 2%)

17,000

b. Jan. 15, 2017 Dr. Royalty fee payable 76,500

Cr. Cash

($59,500 + $17,000)

76,500


a. Summary journal entries

2018 Dr. Cash (6 × $2,000) 12,000

Cr. Deferred revenue 12,000

2018 Dr. Cash (2 × $3,000) 6,000

Dr. Deferred revenue (2 × $2,000) 4,000

Cr. Revenue (2 × $5,000) 10,000

Dr. Cost of goods sold (2 × $2,300) 4,600

Cr. Cash 4,600

2019 Dr. Cash (4 × $3,000) 12,000

Dr. Deferred revenue (4 × $2,000) 8,000

Cr. Revenue (4 × $5,000) 20,000

Dr. Cost of goods sold (4 × $2,300) 9,200

Cr. Cash 9,200

b. The balance in the deferred revenue account as at December 31, 2018 was $8,000 ($12,000 –

$4,000 or $2,000 × 4)



11-11


1.

Dr. Warranty expense 30,000

Cr. Provision for warranty obligations 30,000

2,500 × ($5 + $7) = $30,000

2.

Dr. Provision for warranty obligations 6,000

Cr. Wage expense 6,000

3. The total provision for warranty obligations that will be reported at year-end is $24,000

($30,000 – $6,000). Of this amount, $6,500 will be reported as a current obligation [(2,500 ×

$5) – $6,000 = $6,500] and the $17,500 balance as a non-current liability (2,500 × $7 =

$17,500) or ($24,000 – $6,500 = $17,500).

4. Companies offer warranties that their products will be free from defects for a specified period

to facilitate the sale of their merchandise.


The obligation is initially valued at the spot exchange rate evident on the transaction date and

revalued at period end using the period ending spot rate.

May 1,

2016

Dr. Cash (US$140,000 × C$1.02 / US$1.00 ) 142,800

Cr. Bank loan 142,800

Dec. 31,

2016

Dr. Foreign exchange loss

(US$140,000 × (C$1.04 – C$1.02) / US$1.00)

2,800

Cr. Bank loan 2,800



11-12



revalued at period end and payment date using the applicable spot rate.

Dec. 15, 2015 Dr. Supplies expense

(US$5,000 × C$1.04 / US$1.00)

5,200

Cr. Trade account payable 5,200

Dec. 31, 2015 Dr. Trade account payable 150

Cr. Foreign exchange gain

(US$5,000 × (C$1.04 – C$1.01) / US$1.00)

150

Jan. 3, 2016 Dr. Foreign exchange loss 100

Cr. Trade account payable

(US$5,000 × (C$1.03 – C$1.01) / US$1.00)

100

Dr. Trade account payable ($5,200 - $150 + $100) 5,150

Cr. Cash

(US$5,000 × C$1.03 / US$1.00)

5,150


a. Revenue is recognized for the award portion of company-offered rewards when the customer

claims their reward. Revenue is recognized for the award portion of third-party rewards at the

time of sale.

b. The transaction price must be allocated to the sales and award performance obligations based

on their relative stand-alone selling prices.



To recognize the sales-related revenue in 2015

a. Dr. Cash (20,000 × $600) 12,000,000

Cr. Sales 11,700,000

Cr. Provision for manufacturer’s rebates

((20,000 × $50 × 30%)

300,000

Dr. Cost of goods sold (20,000 × $350) 7,000,000

Cr. Inventory 7,000,000

To recognize the issuance of the rebate cheques in 2016

b. Dr. Provision for manufacturer’s rebates 300,000

Cr. Cash 300,000



11-13


a. Dr. Computer system 19,231

Cr. Note payable ($20,000 / 1.04) 19,231

Using a BAII PLUS financial calculator

1N, 4 I/Y, 20000 FV, CPT PV PV = –19,231

b. Dr. Interest expense 769

Cr. Note payable 769

$19,231 × 4% = $769

c. Dr. Note payable 20,000

Cr. Cash 20,000

No entry for interest is required as it had been accrued on December 31, 2014.


a. Dr. Automobile 40,000

Cr. Note payable 30,000

Cr. Cash 10,000

b. Dr. Interest expense 605

Cr. Accrued interest payable 605

$30,000 × 4% × 184 / 365 = $605 (rounded)

c. Dr. Interest expense 296

Dr. Accrued interest payable 605

Dr. Note payable 30,000

Cr. Cash ($30,000 + $296 + $605) 30,901

$30,000 × 4% × 90 / 365 = $296 (rounded)



11-14


a.

Nov. 15,

2017

Dr. Supplies inventory 4,900

Cr. Trade payables 4,900

[$5,000 × (100% – 2%)]

Nov. 22,

2017

Dr. Equipment—washing machines 8,000

Cr. Notes payable 8,000

Recorded at face value as it is a short-term note and the interest component is

immaterial

Nov. 28,

2017

Dr. Cash 20,000


Nov. 30,

2017

Dr. Interest expense (bank loan) 7

Cr. Cash ($20,000 × 4% × 3/365 = $7 (rounded)) 7

Dec. 18,

2017

Dr. Supplies inventory 3,920

Cr. Trade payables ($4,000 × (100% – 2%)) 3,920

Dec. 21,

2017

Dr. Equipment—dryers 9,615

Cr. Notes payable ($10,000 / 1.04) 9,615

Using a BAII PLUS financial calculator 1 N, 4 I/Y, 10,000 FV, CPT PV PV = –9,615 (rounded)

4% is an appropriate discount rate to use as the question identifies this as the market

rate of interest for NVL's short-term borrowings

Dec. 22,

2017

Dr. Trade payables 4,900

Dr. Purchase discounts lost 100

Cr. Cash 5,000

Dec. 22,

2017

Dr. Trade payables 3,920

Cr. Cash 3,920

Dec. 31,

2017

Dr. Payroll expense 20,000

Cr. Cash 18,600

Cr. Employee remittances payable 1,400

Dec. 31,

2017

Dr. Interest expense (bank loan) 68

Cr. Cash ($20,000 × 4% × 31/365 = $68

(rounded))

68

Dec. 31,

2017

Dr. Interest expense (note payable) 12

Cr. Note payable 12

[$9,615 × 4% × 11/365 = $12 (rounded)]



11-15

b. When the gross method is used, the payable is recorded at the invoiced amount, as is the

asset acquired. If the discount is taken, the book value of the asset acquired is reduced by an

equivalent amount. If the discount is not taken, an adjustment is not required.

When the net method is used, the payable is recorded at the invoiced amount less the

discount, as is the asset acquired. If the discount is taken, an adjustment is not required. If the

discount is not taken, an income statement account ―purchase discounts lost‖ is debited for

the amount of the discount forgone.

From a theoretical perspective, the net method should be used as forgone discounts are a

financing cost. From a practical perspective, the gross method is widely used as it is simpler

to use and as the forgone discounts are usually immaterial.


Aug. 15 Dr. Equipment—inventory monitoring system 6,000


Recorded at face value as it is a short-term note and the

interest component is immaterial

Aug. 18 Dr. Cash 10,000


Aug. 21 Dr. Inventory 8,000


Aug. 30 Dr. Interest expense (bank loan) 15

Cr. Cash ($10,000 × 4% × 14/365 = $15

(rounded))

15

Sept. 20 Dr. Equipment—waste management system 7,619

Cr. Notes payable ($8,000 / 1.05) 7,619

Using a BAII PLUS financial calculator 1 N, 5 I/Y, 8,000 FV, CPT PV PV = –7,619 (rounded)

5% is an appropriate discount rate to use as the question

identifies this as the market rate of interest for MEI's

unsecured short-term borrowings

Sept. 23 Dr. Inventory 3,000


Sept. 24 Dr. Trade payables ($8,000 + $3,000) 11,000

Cr. Inventory ($3,000 x 3%) 90

Cr. Cash 10,910

The discount was lost on the $8,000 payable as the

invoice was outstanding for more than 10 days.



11-16

Sept. 30 Dr. Utilities expense 1,700

Cr. Accrued trade payables 1,700

Sept. 30 Dr. Interest expense (bank loan) 33

Cr. Cash ($10,000 × 4% × 30/365 = $33

(rounded))

33

Sept. 30 Dr. Interest expense (note payable) 11

Cr. Note payable [$7,619 × 5% × 11/365 = $11

(rounded)]

11


Maturing obligations are classified as either current or non-current liabilities depending on the

circumstances.

* If a renewal agreement is entered into before year-end, the obligation is classified as a non-

current liability.

* If the loan is renewed after year-end, but before the statements are approved for issue, the

obligation is classified as a current liability. The renewal is disclosed in the notes to the

financial statements.

* If the loan is not renewed or renewed after the statements are approved for issue, the

obligation is classified as a current liability.


Loans in default are classified as either current or non-current liabilities depending on the

circumstances.

* If, before year-end, the lender agrees to a grace period to cure the defaults that extends at

least twelve months after the balance sheet date, the obligation is classified as a non-current

liability.

* If the lender agrees to a grace period to cure the default after year-end but before the

statements are approved for issue, the obligation is classified as a current liability. Providing

the grace period is for one year or more, the waiver of default is disclosed in the notes to the


* If the lender does not agree to a grace period or its approval is received after the statements

are approved for issue, the obligation is classified as a current liability.



11-17


a.

Jan. 1 Dr. Cash 1,800,000

Cr. Deferred revenue 1,800,000

10,000 × $180 = $1,800,000

Apr. 1 Dr. Cash 900,000


5,000 × $180 = $900,000

Nov. 1 Dr. Cash 2,160,000

Cr. Deferred revenue 2,160,000

12,000 × $180 = $2,160,000

b.

Dec. 31 Dr. Deferred revenue 945,000

Cr. Revenue 945,000

Dec. 31 Dr. Magazine expense 378,000

Cr. Cash 378,000

$180/36 = $5 in revenue per magazine sold

Sales

date

Number sold—

A

Months delivered—

B

Revenue—A × B ×

$5

Expense—A × B ×

$2

Jan. 1 10,000 12 $600,000 $240,000

Apr. 1 5,000 9 225,000 90,000

Nov. 1 12,000 2 120,000 48,000

Revenue and expense to be recognized $945,000 $378,000



11-18


a.

Jan. 1 Dr. Cash 576,000


8,000 × $72 = $576,000

Feb. 1 Dr. Cash 432,000


6,000 × $72 = $432,000

Aug. 1 Dr. Cash 648,000


9,000 × $72 = $648,000

Dec. 1 Dr. Cash 864,000


12,000 × $72 = $864,000

b.

Dec. 31 Dr. Deferred revenue 1,314,000

Cr. Revenue 1,314,000

Dec. 31 Dr. Production and delivery expense 657,000

Cr. Cash 657,000

$72/12 = $6 in revenue per month per newspaper subscription sold

Sales

date

Number sold—

A

Months delivered—

B

Revenue—A × B ×

$6

Expense—A × B ×

$3

Jan. 1 8,000 12 $ 576,000 $288,000

Feb. 1 6,000 11 396,000 198,000

Aug. 1 9,000 5 270,000 135,000

Dec. 1 12,000 1 72,000 36,000

Revenue and expense to be recognized $1,314,000 $657,000



11-19


To recognize the provision in 2017

a. Dr. Warranty expense 240,000

Cr. Provision for warranty payable 240,000

[$4,800,000 × (1% + 2% + 2%)]

To recognize partial satisfaction of the warranty obligation in 2017

Dr. Provision for warranty payable 240,000

Cr. Parts inventory 150,000


To recognize the provision in 2018



($5,400,000 × 7%)

To recognize partial satisfaction of the warranty obligation in 2018




b. The balance in the warranty payable account as at December 31, 2018 was $338,000 as

set out in the T-account that follows:

Provision for Warranty Payable

260,000 Balance Dec. 31, 2016

240,000 Provision 2017

Claims 2017 240,000

378,000 Provision 2018

Claims 2018 300,000

338,000 Balance Dec. 31, 2018



11-20



revalued at period end using the period ending spot rate. Interest is charged to expense at the

average rate for the period, rather than the spot raid paid at time of payment. The difference is

recognized as a gain or loss on the income statement.

Dec. 1, 2018 Dr. Cash (US$1,000,000 × C$1.08 / US$1.00) 1,080,000

Cr. Bank loan 1,080,000

Dec. 31,

2018

Dr. Interest expense

(US$1,000,000 × 5.0% × 31/365× C$1.09 / US$1.00)

4,629

Dr. Foreign exchange loss 42

Cr. Cash

(US$1,000,000 × 5.0% × 31/365× C$1.10 /

US$1.00)

4,671

Dec. 31,

2018

Dr. Foreign exchange loss

(US$1,000,000 × (C$1.10 – C$1.08) / US$1.00)

20,000

Cr. Bank loan 20,000


a. As per Canadian Tire Corporation, Limited’s balance sheet as at December 28, 2013, the

company reported current liabilities totaling $4,322.1 million categorized as follows:

Type of liability Amount owing on Dec. 28, 2013 – in $millions

Bank indebtedness $ 69.0

Deposits 1,178.4

Trade and other payables 1,817.4

Provisions 196.1

Short-term borrowings 120.3

Loans payable 611.2

Income taxes payable 57.5

Current portion of long-term debt 272.2

Total current liabilities $4,322.1

b. As per Note 21, the categories of provisions reported by Canadian Tire follow:

Type of provision Amount owing on Dec. 28, 2013 – in $millions

Total Long-term Current

Sales and warranty returns $109.5 $ 4.1 $105.4

Site restoration and decommissioning 32.4 23.0 9.4

Onerous contracts 3.2 0.2 3.0

Customer loyalty 71.2 1.4 69.8

Other 18.0 9.5 8.5

Total $234.3 $38.2 $196.1



11-21

c. As per Note 23, Canadian Tire reports its commercial paper at amortized cost.

d. Canadian Tire reported $7,977.8 million in current assets at December 28, 2013. Its current

ratio was thus $7,977.8 / $4,322.1 = 1.85:1 and its working capital was $7,977.8 million -

$4,322.1 million = $3,655.7 million.



To recognize the flight-related revenue in 2015

a. Dr. Cash 8,000,000

Cr. Flight revenue 7,910,000

Cr. Unearned revenue (award points) 90,000

To recognize reward point revenue in 2016

b. Dr. Unearned revenue (award points) 36,000

Cr. Award revenue 36,000




Supporting computations and notes

- 6,000,000 miles are expected to be redeemed (8,000,000 × 75% = 6,000,000). This translates

into 500 flights (6,000,000 / [(15,000 + 25,000) / 2] = 300).

- To obtain the amount of reward revenue to recognize, the denominator is the number of miles

expected to be redeemed rather than the number awarded. ($90,000 / 300 flights = $300).

- 120 reward flights are redeemed in 2016. (120 / 300 × $90,000 = $36,000).

- 150 reward flights are redeemed in 2017. (150 / 300 × $90,000 = $45,000).



11-22



To recognize the sales-related revenue in 2018

a. Dr. Cash 15,000,000

Cr. Sales (given) 14,895,000

Cr. Unearned revenue (award points - given) 105,000

Dr. Cost of goods sold [14,895,000 / (1 + 50%)] 9,930,000


To recognize premium revenue in 2019


Cr. Sales 30,000

Dr. Cost of goods sold [30,000 / (1 + 50%)] 20,000


To recognize premium revenue in 2020


Cr. Sales 45,000

Dr. Cost of goods sold [45,000 / (1 + 50%)] 30,000



- 3,000,000 points are redeemed in 2020. (3,000,000 / 1,000 × $10 = $30,000).

- 4,500,000 points are redeemed in 2021. (4,500,000 / 1,000 × $10 = $45,000).

c. Companies offer incentive programs to increase sales.


Recall that the amount to be reported as a current liability is any accrued interest payable at

balance sheet date plus the principal amount due within the twelve months immediately

following the balance sheet date. If the loan becomes payable on demand due to a default by the

borrower, the balance of the loan plus accrued interest is normally reported as a current liability.

An exception to this requirement is made when the lender agrees before the statement date to

waive the default for a period of at least one year after the balance sheet date.



11-23

The first step in answering this question it to create a loan amortization schedule matching the

payment due date:

Loan amortization schedule – payments due December 31

Date Interest expense Payment Loan reduction Loan balance

Jan. 1, 2016 $4,000,000

Dec. 31, 2016 $160,000 (a) $898,508 $738,508 3,261,492

Dec. 31, 2017 130,460 (b) 898,508 768,048 2,493,444

(a) $4,000,000 × 4% = $160,000

(b) $3,261,492 × 4% = $130,460 (rounded)

Scenario 1 – the amount to be reported as a current liability is the $768,048 principal portion of

the payment next due December 31, 2017. (Principal amount due within twelve months of the

balance sheet date; no accrued interest payable).

Scenario 2 – the loan was in default as at year end and as such $4,160,000 should be reported as

a current liability ($4,000,000 principal portion + $160,000 interest).

Loan amortization schedule – payments due January 1

Date Interest expense Payment Loan reduction Loan balance including

accrued interest

Jan. 1, 2016 $4,000,000

Dec. 31, 2016 $160,000 (a) 4,160,000

Jan. 1, 2017 $898,508 $898,508 3,261,492

Dec. 31, 2017 130,460 (b) 3,391,952

(a) $4,000,000 × 4% = $160,000

(b) $3,261,492 × 4% = $130,460 (rounded)

Scenario 3 – the amount to be reported as a current liability is the $898,508 payment due on

January 1, 2017. This includes the $160,000 in accrued interest plus the $738,508 principal

portion of the payment. (Principal amount due within twelve months of the balance sheet date

plus accrued interest payable).

Scenario 4 – The grace period was not granted by the lender until after year-end so $4,160,000

should be reported as a current liability ($4,000,000 principal portion + $160,000 interest). As

the covenant waiver was received before the financial statements were approved for acceptance,

and as the grace period extended more than twelve months past the balance sheet date, this

information may be disclosed in the notes to the financial statements as a non-adjusting event.



11-24


a.

Dr. Cash 5,000,000

Cr. Earned revenue 5,000,000

(1,000 × $5,000 = $5,000,000)

Dr. Cost of goods sold 4,000,000


[$5,000,000 / (1 + 25%) = $4,000,000]



(1,000 × $400 = $400,000)




b.

Dr. Cash 5,000,000

Cr. Earned revenue 5,000,000

(1,000 × $5,000 = $5,000,000)

Dr. Cost of goods sold 4,000,000


[$5,000,000 / (1 + 25%) = $4,000,000]




c. The cash basis cannot normally be used to account for warranty expenses as it does not

properly match expenses to revenues. In the example above, 2018’s profitability is overstated

$230,000 ($400,000 – $170,000) when the cash basis is used.

d. If management’s provision subsequently proves to be incorrect, the change in estimate is

adjusted for prospectively in the manner discussed in Chapter 3. Essentially Stanger will

debit warranty expense for an additional $70,000 in 2019 when the new information (claims

in excess of the provision) becomes known. Stanger is not required to restate 2018’s results

as this is a change in estimate, rather than an error.



11-25


a. Sales occurred evenly during the year, therefore in 2018 GHF earned, on average, six months

of revenue on the maintenance contracts. As per the chart below, GHF earned revenues of

$14,520.

a. One

year

Two

year

Three

year

Contract

value

Revenue

earned

Unearned

revenue

Photocopiers $240 $420 $600

# of contracts sold 24 12 36

$ value of contracts sold $5,760 $5,040 $21,600 $32,400

Revenue earned (%)* 50% 25% 16 2/3%

Revenue earned ($) $2,880 $1,260 $3,600 $7,740

Unearned revenue ($) $2,880 $3,780 $18,000 $24,660

Fax machines $180 $320 $450

# of contracts sold 24 24 36

$ value of contracts sold $4,320 $7,680 $16,200 $28,200

Revenue earned (%) 50% 25% 16⅔%

Revenue earned ($) $2,160 $1,920 $2,700 $6,780

Unearned revenue ($) $2,160 $5,760 $13,500 $21,420

$60,600 $14,520 $46,080

* 6 months earned / 12 month contract = 50%; 6 month / 24 month contract = 25%; 6 month / 36

month contract = 16⅔%

b. and c. Deferred revenue is $46,080 ($60,600 – $14,520 = $46,080). Of this, the remaining

services to be provided under the one-year contract are current liabilities and the services to

be provided in the next 12 months under the two- and three-year contracts are current

liabilities. As per the chart below, $24,000 of GHF’s deferred revenue should be reported as

a current liability and $22,080 reported as a non-current liability.

b. and c. Total deferred Current Non-current

Photocopiers

One year $2,880 $2,880 $0

Two year* $3,780 $2,520 $1,260

Three year** $18,000 $7,200 $10,800

Total $24,660 $12,600 $12,060

Fax machines

One year $2,160 $2,160 $0

Two year*** $5,760 $3,840 $1,920

Three year**** $13,500 $5,400 $8,100

Total $21,420 $11,400 $10,020

Total $46,080 $24,000 $22,080



11-26

* The value of the two-year photocopier contracts sold was $5,040. One year of the two-year

agreement is a current liability – $5,040 / 2 = $2,520

** The value of the three-year photocopier contracts sold was $21,600. One year of the three-

year agreement is a current liability – $21,600 / 3 = $7,200

*** The value of the two-year fax machine contracts sold was $7,680. One year of the two-year

agreement is a current liability – $7,680 / 2 = $3,840

**** The value of the three-year fax machine contracts sold was $16,200. One year of the three

year agreement is a current liability – $16,200 / 3 = $5,400


a.

Dr. Unearned revenue 6,300

Cr. Earned revenue 6,300

Passage of time—one-year memberships (180 × $420 / 12 = $6,300)



Passage of time—two-year memberships (120 × $720 / 24 = $3,600)

Dr. Cash 9,240


Pay as you go memberships (220 – 34 + 45 = 231; 231 × $40 = $9,240)

Dr. Cash 8,400

Cr. Unearned revenue 8,400

Sale of 20 new one-year memberships (20 × $420 = $8,400)

Dr. Cash 7,200


Sale of 10 new two-year memberships (10 × $720 = $7,200)



Obligation fulfilled—112 personal trainer coupons redeemed (112 × $750 / 10 =

$8,400)

Dr. Cash 7,500


Sale of 10 new personal trainer packages (10 × $750 = $7,500)



11-27

b. The balance in the deferred revenue account as at January 31, 2017 was $117,150 as set out

in the T-account that follows:

Unearned revenue

112,350 Balance Dec. 31, 2016

Passage of time—one year 6,300

Passage of time—two years 3,600

8,400 Sale of one-year packages

7,200 Sale of two-year packages

Redemption of PTP 8,400

7,500 Sale of PTP

117,150 Balance Jan. 31, 2017

The two-year membership is the only product offered that gives rise to a non-current liability.

In January, 10 new memberships were sold and five expired. Thus, the total obligation

pertaining to the two-year memberships increased $3,600 [$720 × (10 – 5)]. Twelve months,

or 50% of each membership, is a current obligation with the remainder being a non-current

obligation. The non-current portion of the liability is $13,500 ($3,600 × 50% = $1,800;

$11,700 + $1,800 = $13,500). The current portion of the liability is $103,650 ($117,150 –

$13,500).

This is the shortcut way of doing this. You will obtain the same result if you construct a

spreadsheet tracking the months remaining for all two-year memberships sold, segregating

them as to currency.

$720 / 24 = $30 per month revenue

Month sold # sold Months left Current Non-current $ current $ non-current

Feb. 2015 5 1 1 0 $ 150 $ -

Mar. 2015 5 2 2 0 $ 300 $ -

Apr. 2015 5 3 3 0 $ 450 $ -

May 2015 5 4 4 0 $ 600 $ -

Jun. 2015 5 5 5 0 $ 750 $ -

Jul. 2015 5 6 6 0 $ 900 $ -

Aug. 2015 5 7 7 0 $ 1,050 $ -

Sep. 2015 5 8 8 0 $ 1,200 $ -

Oct. 2015 5 9 9 0 $ 1,350 $ -

Nov. 2015 5 10 10 0 $ 1,500 $ -

Dec. 2015 5 11 11 0 $ 1,650 $ -

Jan. 2016 5 12 12 0 $ 1,800 $ -

Feb. 2016 5 13 12 1 $ 1,800 $ 150

Mar. 2016 5 14 12 2 $ 1,800 $ 300

Apr. 2016 5 15 12 3 $ 1,800 $ 450

May 2016 5 16 12 4 $ 1,800 $ 600

Jun. 2016 5 17 12 5 $ 1,800 $ 750



11-28

Jul. 2016 5 18 12 6 $ 1,800 $ 900

Aug. 2016 5 19 12 7 $ 1,800 $ 1,050

Sep. 2016 5 20 12 8 $ 1,800 $ 1,200

Oct. 2016 5 21 12 9 $ 1,800 $ 1,350

Nov. 2016 5 22 12 10 $ 1,800 $ 1,500

Dec. 2016 5 23 12 11 $ 1,800 $ 1,650

Jan. 2017 10 24 12 12 $ 3,600 $ 3,600

$ 35,100 $ 13,500

The current portion of the obligation is $117,150 – $13,500 = $103,650



To recognize the flight-related revenue in 2018

a. Dr. Cash 10,000,000

Cr. Flight revenue 9,925,000

Cr. Unearned revenue (award points) 75,000


b. Dr. Cash 20,000

Dr. Unearned revenue (award points) 30,000


Cr. Flight revenue 20,000


b. Dr. Cash 15,000

Dr. Unearned revenue (award points) 22,500


Cr. Flight revenue 15,000


- 7,500,000 miles are expected to be redeemed (9,375,000 × 80% = 7,500,000). This translates

into 500 flights (7,500,000 / 15,000 = 500).

- 200 reward flights are redeemed in 2019. (200 / 500 × $75,000 = $30,000). A $100 service

charge is levied for each award flight. (200 × $100 = $20,000)

- 150 reward flights are redeemed in 2020. (150 / 500 × $75,000 = $22,500). A $100 service

charge is levied for each award flight. (150 × $100 = $15,000)

- To obtain the amount of reward revenue to recognize, the denominator is the number of miles

expected to be redeemed rather than the number awarded.

- ($75,000 / 500 flights = $150), which is the value allocated to each flight expected to be

awarded. From an accounting perspective this is the net amount. The gross cost of providing the

flight minus the costs to be recovered equals the allocation of the award ($250 – $100 = $150)



11-29


To provide for the expected liability settlement

Dr. Lawsuit settlement expense 8,000,000

Cr. Provision for liability settlement costs 8,000,000

Provision measured using the most likely outcome (80% probability of offer acceptance)

To allocate a portion of the ticket sales proceeds to the award program

Dr. Flight revenue 720,000

Cr. Unearned revenue (award miles) 720,000

As the award portion of the flights has not previously been allowed for, an entry is required

to reverse a portion of the ticket sales revenue from flight revenue to award revenue

To recognize award point revenue in 2016

Dr. Unearned revenue (award miles) 144,000


(30,000,000 × 80% = 24,000,000) miles expected to be redeemed. (4,800,000/24,000,000 ×

$720,000 = $144,000)


a. A contingent liability is either i) a present obligation, the amount of which cannot be

measured with sufficient reliability; or ii) a possible obligation. Possible obligations are

amounts that may be owed depending on the outcome of future event(s). A contingent asset

is a possible asset. Possible assets are amounts that may be due depending on the outcome of

future event(s).

b. There are two factors that govern accounting for contingent liabilities: i) the likelihood of the

outcome and ii) the measurability of the obligation. If the outcome is probable and the

obligation is measurable, the entity provides for the obligation using the most likely outcome.

―Probable‖ is defined as likelihood greater than 50%. If the outcome is probable, but the

obligation cannot be reliably measured, or the outcome is only possible, then the entity does

not provide for a liability. Rather, the entity discloses the details of the contingency in the

notes to its financial statements. If the possibility of the outcome is remote, the entity neither

provides for an obligation nor discloses the details.

c. The likelihood of the outcome is the sole factor that governs accounting for contingent assets.

If the likelihood is virtually certain, the asset is provided for in the financial statements. If it

is probable, the details of the contingency are disclosed in the notes to the financial

statements. If the outcome is possible or remote, the entity neither provides for an asset nor

discloses the details.



11-30


The terms ―probable‖, ―possible‖, and ―remote‖ as they pertain to contingencies collectively

describe the likelihood of a possible liability or asset being confirmed as a liability or asset.

Probable is a likelihood of occurrence greater than 50%. Remote is not expected to occur, with

the maximum likelihood being in the range of 5% to 10%. The likelihood of possible falls

between probable and remote.

As accounting for contingent assets and contingent liabilities differs somewhat, they are

discussed separately.

Contingent liabilities:

Whether a contingent obligation can be measured with sufficient reliability must also be

considered, although IFRS suggests that it will be only in extremely rare situations that a

potential obligation cannot be reliably measured. The spectrum of possible accounting treatments

for contingent liabilities is detailed in the matrix below.

Contingent liabilities Obligation can be reliably

measured

Obligation cannot be reliably

measured

Probable: 50%+ Provide for using expected value

techniques

Note disclosure

Possible: 5–10% to

50%

Note disclosure Note disclosure

Remote: <5 to 10% Neither provide nor disclose Neither provide nor disclose

Contingent assets:

Contingent assets are recognized in the financial statements only if realization is virtually certain.

When realization is probable (50 %+), note disclosure is appropriate.


1. (A) The asset is provided for as the outcome is virtually certain. Supreme Court decisions

cannot be appealed. The supporting journal entry is:

Dr. Other receivables (lawsuit) 100,000

Cr. Lawsuit award 100,000

2. (B) The outcome is possible but not probable, so note disclosure is required.

3. (A) A $1,000,000 liability is provided for as the loss is probable and can be reliably

measured. While the final settlement may be as low as $5 million or as high as $10 million,

Canless is responsible only for the $1,000,000 deductible.

Dr. Environmental cleanup expense 1,000,000

Cr. Provision for environmental cleanup costs 1,000,000



11-31

4. (A) The loss is probable and has to be provided for. The most likely outcome is used to

determine the amount of the obligation based on legal counsel’s best estimate of the amount

required to settle the obligation. The midpoint of the range has been used as the most likely

outcome as if the plaintiff is successful all payouts in the stipulated range are equally likely.

Dr. Contract settlement expense 1.100,000

Cr. Provision for contract settlement costs 1,100,000

[($1,000,000 + $1,200,000) / 2]

5. (A) The loss is probable and so the company must make a provision. The most likely

outcome is used to determine the amount of the obligation based on legal counsel’s best

estimate of the amount required to settle the obligation. If Threlfall subsequently accepts the

$100,000 offer, this is a change in estimate that will be dealt with prospectively.

Dr. Lawsuit settlement expense 200,000

Cr. Provision for liability settlement costs 200,000

Provision measured using the most likely outcome (90% probability of $200,00 pay-out)

6. (C or possibly B) The outcome is certainly possible but as the appeal process has not yet

been exhausted it is not virtually certain. Whether the outcome is probable (requiring

disclosure) or possible (neither provided for nor disclosed) is a matter of professional

judgment.


The loss is likely and so the company must recognize a contingent loss for the minimum in the

range less the net amount covered by insurance, and disclose the remainder in the notes to the


Dr. Lawsuit settlement expense 1,500,000

Cr. Lawsuit liability settlement costs 1,500,000

[$6,000,000 - ($5,000,000 - $500,000)]


a. Assuming that the reporting company prepares its financial statements in accordance with

IFRS

1. (A) The loss is probable and has to be provided for. The most likely outcome is used to

determine the amount of the obligation based on legal counsel’s best estimate of the

amount required to settle the obligation. The midpoint of the range has been used as the

most likely outcome as if the plaintiff is successful all payouts in the stipulated range are

equally likely.

Dr. Contract settlement expense 700,000

Cr. Provision for contract settlement costs 700,000

[($600,000 + $800,000) / 2]



11-32

2. (A) The loss is probable and so the company must make a provision. The most likely

outcome is used to determine the amount of the obligation based on legal counsel’s best

estimate of the amount required to settle the obligation. The midpoint of the range has

been used as the most likely outcome as if the plaintiff is successful all payouts in the

stipulated range are equally likely. If Morton subsequently accepts the $200,000 offer,

this is a change in estimate that will be dealt with prospectively.


Cr. Provision for liability settlement costs 250,000

[($200,000 + $300,000) / 2]

b. Assuming that the reporting company prepares its financial statements in accordance with

ASPE

1. (B) The probability of loss is 55% which is less than the 70% threshold commonly used

in ASPE to determine whether payout is likely. Note disclosure is required.

2. (A) The loss is likely and so the company must recognize a contingent loss for the

minimum in the range and disclose the remainder in the notes to the financial statements.


Cr. Lawsuit liability settlement costs 200,000


Financial guarantees are initially recognized at their fair value. ZSK must also disclose its

$150,000 maximum exposure to the underlying credit risk.


Onerous contracts are obligations in which the unavoidable costs of fulfilling the contract exceed

the expected benefits to be received. As the expected benefit may be greater than the current

market value of the item, a contract to purchase assets for more than fair value is not necessarily

onerous.

Onerous contracts must be provided for in the financial statements. The loss recognized equals

the unavoidable costs less the expected economic benefit.


Economic analysis

Situation a Situation b

Expected economic benefit 10,000 × $3.20 = $32,000 10,000 × $2.75 = $27,500

Unavoidable costs 10,000 × $3.00 = $30,000 10,000 × $3.00 = $30,000

Profit (Loss) $ 2,000 $ (2,500)

Result Non-onerous contract Onerous contract for which the

expected loss must be provided



11-33

a. While Kitchener has contracted to pay more for the oil than the current market price, it

remains that the expected economic benefit exceeds the unavoidable costs. The contract is

thus non-onerous and does not need to be provided for.

b. The expected economic benefit is less than the unavoidable costs and must be provided for.

Dr. Loss on onerous contract 2,500

Cr. Provision for loss on onerous contract 2,500


Economic analysis

Situation a Situation b

Expected economic benefit 1,000 × $36.00 = $36,000 1,000 × $45.00 = $45,000

Unavoidable costs 1,000 × $40.00 = $40,000 1,000 × $40.00 = $40,000

Profit (Loss) $ (4,000) $ 5,000

Result Onerous contract for which the

expected loss must be provided

Non-onerous contract

a. The expected economic benefit is less than the unavoidable costs and must be provided for.

Dr. Loss on onerous contract 4,000

Cr. Provision for loss on onerous contract 4,000

b. While Waterloo has contracted to pay more for the silica than the current market price, it

remains that the expected economic benefit exceeds the unavoidable costs. The contract is

thus non-onerous and does not need to be provided for in the financial statements.


1. This contingent liability does not need to be provided for as it is only possible (20%–30%),

not probable (>50%). Note disclosure of the underlying circumstances is required.

2.

Dr. Cash 5,000

Cr. Liability for financial guarantee 5,000

Calgary must also disclose its $500,000 maximum exposure to the underlying credit risk.

3. This contingent asset cannot be recognized as realization is not virtually certain. As

realization is probable, note disclosure of the underlying circumstances is appropriate.

4. The loss is probable and has to be provided for. The most likely outcome is used to determine

the amount of the obligation based on legal counsel’s best estimate of the amount required to

settle the obligation.



11-34

Dr. Loss on lawsuit (breach of contract) 100,000

Cr. Provision for lawsuit settlement costs 100,000

Provision measured using the most likely outcome (50% probability of $100,000 award)

5. A journal entry is not required. Rather, the $5,000,000 must be disclosed as a current liability

in the 2018 financial statements as renewal was not effected before year-end. The fact that

the bank agreed to renew the loan after year-end, but before the statements were authorized

for issue, is disclosed as a non-adjusting event in the notes to the financial statements.


1. The inventory is recorded at cost and a payable established for the Canadian dollar equivalent

of the obligation.

Dr. Television inventory 9,900

Cr. Trade accounts payable 9,900

(20 × US $500 × C$0.99/US$1.00)

2. A journal entry is not required. The solvent is a relatively low cost component of the

chromatography process. While the market price is now much lower than the price

previously contracted for, it is inferred that the expected benefits to Regina still exceed the

unavoidable costs. Accordingly, the contract is non-onerous and does not need to be provided

for in Regina's financial statements.

3. A journal entry is not required. The loan may be reported as a non-current liability as the

grace period extends 12 months after the balance sheet date.

4. The loss is probable and has to be provided for. The most likely outcome is used to determine

the amount of the obligation based on legal counsel’s best estimate of the amount required to

settle the obligation.

Dr. Loss on lawsuit (customer injury) 300,000

Cr. Provision for lawsuit settlement costs 300,000

Provision measured using the most likely outcome (60% probability of $300,000 award)

5. This contingent liability does not need to be provided for as it is only possible (10%–32%),

not probable (>50%). Note disclosure of the underlying circumstances is required.



11-35


1. A journal entry is not required as the outstanding amount of the liability has not changed.

From a reporting perspective, the loan will be reported as a non-current obligation as the

lender agreed to a 12-month grace period before year-end.

2. IFRS allows for short-term, zero-interest-rate notes to be measured at the original invoice

amount if the effect of discounting is immaterial. This is the case here as the note is due in 30

days and the imputed interest amount is immaterial (about $30).

Dr. Storage bins 20,000


3. While Port Mellon has contracted to pay more for the phosphorus than the year-end market

price, it remains that the expected economic benefit exceeds the unavoidable costs. The

contract is thus non-onerous and does not need to be provided for.

4. This is a third-party reward. As Gander is not an agent of the airline, revenue and expense

pertaining to the award are separately recognized.

May 24,

2017

Dr. Cash 25,000

Cr. Parking revenue ($25,000 – $1,000) 24,000

Cr. Award revenue (50,000 × $0.02) 1,000

May 24,

2017

Dr. Award expense (50,000 × $0.02) 1,000

Cr. Cash (50,000 × $0.02) 1,000

5.

Dec. 31,

2017

Dr. Interest expense 256

Cr. Accrued interest payable 256

$20,000 × 6% × 78 / 365 = $256 (rounded)



11-36

N. Mini-Cases

Case 1: Cool Look Limited. Suggested solution:

This memo presents an analysis of the going-concern assumption as it relates to this case and discusses

the accounting issues that need to be resolved before the financial statements can be finalized.

Memo to: Audit file

From: CPA

Subject: Accounting issues for discussion with the partner in charge of the CLL audit

Going concern

There is a need to assess the going-concern assumption in the 2015 audit of CLL as IAS 1 requires that

management shall make an assessment of an entity’s ability to continue as a going concern.

CLL’s bank has extended CLL’s credit up to February 29, 2016, at which time it reserves the right to call

its loan if the covenants are not met. Being in breach of covenants in and of itself does not automatically

result in CLL not being a going concern. However, there are a number of other factors that do suggest

CLL is not a going concern. CLL has lost money for at least the past two years. It also has stretched its

accounts payable from just under $1 million a year ago to over $2.3 million. It currently cannot afford to

upgrade and refit its equipment, and is not maintaining its equipment or maintaining its insurance

coverage. Furthermore, the board passed a resolution to temporarily delay remitting taxes until cash flows

improved. These points indicate serious liquidity problems.

The financial ratios are not currently met by CLL. Before making any adjustments for audit findings, the

November 30, 2015 statements show CLL is onside on one of the two ratio requirements. The current

ratio is 1.7:1, which is more than the minimum 1:1 allowed. However, reclassifying the long-term debt as

a current liability (a possibility discussed later in my memo) would reduce the current ratio to 0.4: 1,

which is less than the bank’s requirement. It is also possible that the bank will not consider the $500,000

loan to Martin Roy in its current-ratio calculation, which would reduce the ratio further. In addition, the

debt-to-equity ratio is 86%, while the bank is asking for a maximum debt-to-equity ratio of 80%. This

ratio will require improvement in order to meet the covenants set out by the bank in its November 1 letter.

We need to discuss the extent of the problem with management. Evidently management and the Board are

concerned about the cash position since they have taken steps to reduce spending. But they also increased

their risk exposure by delaying payments and cancelling the insurance. We need additional information

before concluding on the validity of the going-concern assumption. For example, we need to see future

cash flow forecasts, sales forecasts, and future sales contracts.

There are a number of positive factors that suggest CLL is a going concern. CLL has $1,094,000 cash on

hand as of November 30. If the equipment can be refitted using that cash in the next three months, CLL

may remain a going concern. Also, CLL still has a positive equity, and our review of the minutes shows

that the company has a new, large contract. These factors suggest that CLL remains a going concern,

despite the possibility of the bank calling its loan any time after February 29, 2016.

Although further investigation is required, it is probable that the company will be judged to be a going

concern given the positive factors identified. If there are material uncertainties related to events or



11-37

conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the

company is required to disclose those uncertainties.

Accounting issues requiring resolution

Capital assets

CLL has $1.3 million (book value) of capital assets that are apparently not usable. A determination must

be made as to whether an impairment loss should be recorded. The question is whether these assets have

been abandoned by CLL or temporarily stored. Management will likely argue that the assets are simply

being stored and that each asset’s value is not impaired because refitting the assets makes them usable

again. However, the assets are not currently being used, and CLL may not have the immediate financial

resources to refit them. Therefore, the assets’ recoverable value may be less than its carrying amount. The

assets should be tested for impairment.

The first question to resolve is which Cash Generating Unit (CGU) or units the dormant equipment

belongs to. IFRS defines CGUs as the smallest identifiable group of assets that generates cash inflows

that are largely independent of the cash inflows from other assets or groups of assets. Based on the

information I have, I assume the dormant equipment can be treated as a CGU. However, these unused

assets could also be considered as the larger asset group of all CLL’s equipment.

After determining an appropriate CGU(s), the next step is to determine the recoverable amount of the

CGU(s). If the book value of the equipment is greater than the recoverable amount, then it should be

written down to the recoverable amount. The impairment loss is applied firstly to goodwill, if any,

pertaining to the CGU, but this does not apply here. With respect to the idle equipment, it is possible that

it has some value, due to the fact that refitting can be performed on the equipment to make it usable again.

This aspect needs to be explored further so as to arrive at an accurate estimate of the CGU’s recoverable

value.

Inventory transaction

Finished goods inventory at a cost of $565,000 was shipped by CLL to Big Bargain Clothing (BBC), a

national retail clothing outlet store, on November 29, 2015. The shipment was recorded as sales revenue

of $1 million, generating a gross profit of $435,000.

BBC can return unsold inventory to CLL at any time after February 1, 2016. This suggests that the

transaction is more like a consignment. Goods on consignment should not be recognized as sold until

purchased by the final customer. At this time, we have no information as to whether BBC has sold any of

the finished goods inventory. However, given that the inventory was shipped on November 29, it is very

unlikely that any would have been sold by the November 30 year-end. In addition, revenue-recognition

standards (IAS 18) indicate that a right of return may preclude recognition of revenue. Given the special

nature of the arrangement (meaning that CLL has no experience with this type of transaction and so will

not be able to reasonably estimate returns), it is inappropriate for CLL to recognize the revenue.

Secured operating line of credit

The secured operating line of credit is classified as long-term debt. This classification is in doubt. Until

now the bank has waived its right to call the loan, justifying the long-term classification. Now that the

December 1 date is passed (and considering the letter from the bank indicating that it may in fact call the

loan if certain ratios do not improve), it is clear that the loan should be classified as current. Also, IAS 1

addresses situations where an entity would be in violation of debt covenants at the balance sheet date. The

fact that CLL is in clear violation of covenants now and is unlikely to be able to correct the situation by

February 29, 2016, provides additional support for treating the loan as current.



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Tax/GST liabilities

The Board passed a resolution to temporarily delay remitting taxes until cash flows improved. We need to

assess the amount of the unrecorded liabilities, including interest and penalties, and make sure they are

recorded in the financial statements.

Case 2: Earth Movers Ltd. Suggested solution:

Dear Mr. Donnelly:

You asked us to determine the amount of financing that Earth Movers Ltd. can expect to obtain from S&L

Bank. The bank intends to base its loan on EML’s audited financial statements.

This report first explains our assumptions and also the adjustments we had to make to EML’s unaudited

balance sheet in order to calculate the amount of financing available. You should examine these

assumptions carefully, since you may or may not agree with them. As you requested, we have explained

the accounting policies that caused us concern and have stated how they should be changed.

The report then sets out our calculations and their results. We need additional information from you

before we can make final calculations. Further, you should be aware that the bank may make assumptions

and adjustments that differ from ours and may, therefore, arrive at a different loan figure.

By our preliminary calculations, S&L Bank can be expected to lend you approximately $2.6 million,

which will be sufficient to repay EML’s existing bank loan but not sufficient to repay your loan to EML.

We will contact you to arrange a meeting to discuss our report and obtain the information we need.

Yours truly,

WB, Chartered Professional Accountants



11-39

Draft report to Earth Movers Ltd. (EML) on financing available from S&L Bank

Basis of calculations: the financial statements

The amount of financing from S&L is calculated using the figures reported in the audited financial

statements, which have to be in accordance with International Financial Reporting Standards (IFRS).

Before the financing can be calculated, EML’s statements must be adjusted. Please bear in mind that the

financial statements have not been audited; therefore, the account balances may change. In that case, the

amount of financing available will also change.

IFRS permits choices in the selection of certain accounting policies. When possible, EML should select

policies that will improve the working capital ratio and the capital assets, both of which are used in the

bank’s formulae to calculate the amount of financing available. At the same time, the financial statements

should not mislead the bank, the primary user. Moreover, existing accounting policies can be changed

only if it is either required by IFRS or results in the financial statements providing reliable and more

relevant financial information.

Working capital ratio

The first step in calculating the amount of financing is to determine the working capital ratio since it

determines which of the bank’s two formulae is to be used. Formula 2 requires EML to have a higher

working capital ratio than Formula 1 does, but is the more favourable formula to use since it results in a

larger loan.

The working capital ratio is the ratio of current assets to current liabilities. Calculating it is

straightforward, but problems can arise in determining precisely what should be classified as current

assets and as current liabilities. Because this is open to interpretation, any loan agreement that EML signs

with S&L Bank should specify the formula used for calculating the loan and the EML assets and

liabilities that the bank accepts as current. In addition, the nature of the assets should be clearly described

in the agreement.

Our calculation of the working capital ratio excludes spare parts inventory since, contrary to what is

reported on the EML balance sheet, it is not a current asset. This asset relates to the earth movers that are

included in equipment. Even though the spare parts inventory is excluded from the calculation of the

working capital ratio, it will increase the capital assets on which money will be lent.

The income taxes payable, also listed on the EML balance sheet, are excluded from the calculation of

working capital. This amount, while current in nature, is a personal liability rather than a corporate

liability. Its exclusion improves the working capital ratio.

Accounting policies: underlying assumptions or adjustments

To prepare the appropriate balance sheet figures, it was necessary to make some assumptions about what

accounting policies to apply. Some estimates were also necessary. These are explained below.

Accounts receivable

Accounts receivable include an amount of $85,000 in disputed invoices, relating to the operations of a

gravel pit. Unless the owner of the gravel pit has given an assurance that the amount will be paid, we are

assuming for the purposes of this report that EML will not be paid. Part of the amount or the full amount

should be written off your books. If the probability of collection cannot be determined, the full amount

should be written off. If an agreement is reached, then the receivable will stay on the books.



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Amount owed to the previous auditor

The accounts payable includes an amount of $146,000 owing to Fred Spot for services rendered over a

period of three years. Has he been pressing for collection? If not, it may be possible to persuade Mr. Spot

to reduce the amount. You should settle this billing with him and reach an amount agreeable to both

parties, thereby decreasing the accounts payable and increasing the working capital. We have made no

assumptions concerning the accounts payable and will wait to hear from you.

Parts of scrapped earth movers held for resale—$60,000

If there are buyers for the scrapped earth movers, and providing that the requirements of IFRS 5 are met,

then this item should be carried on the balance sheet as a current asset. It would then be segregated from

equipment as ―non-current assets held for resale.‖ This treatment will have a favourable impact on the

working capital ratio and the amount of financing available will increase. The drawback is that these

assets do not fall within S&L’s funding formula, although you may be able to negotiate something in this

respect.

Spare parts inventory

The spare parts inventory, which apparently consists solely of wheels, appears to be overvalued. First,

only two earth movers out of a fleet of 21 use size 250H wheels. Second, the wheels are replaced

infrequently. Thus EML seems to have more 250H wheels on hand than are needed in the ordinary course

of business. In addition, the average cost of 350H wheels is $30,000, while that of 250H wheels is

$81,429. The carrying value of equipment is impaired if the carrying amount of the assets exceeds the

recoverable amount, which is the higher of an asset’s fair value less costs to sell and its value in use.

We have arrived at a value for the 250H wheels that we consider reasonable as follows. The one wheel

that was in inventory before the additional six were added was carried at $20,000. (Book value of

$550,000 was transferred on the addition of the six wheels, raising the total book value to $570,000. The

difference of $20,000 is presumably the amount at which the single original wheel was carried.) Using the

$20,000 as the appropriate value for a 250H wheel, we have valued the seven 250H at $140,000. The

amount on the balance sheet should be revised to show this amount.

Besides the overvaluation of the wheels, we had to consider the question of whether the spare parts should

be classified as inventory or as equipment. We decided to classify the spare parts as equipment. Inventory

by definition is merchandise held for resale or supplies to be consumed in the production process, which

is not the case here.

As noted earlier, EML and the bank must agree on definitions to be included in the agreement—for

example, the definitions of such terms as ―inventory‖ and ―equipment.‖ Their definition affects the

amount of financing available since the bank proposes to lend money at different percentages on these

two categories (for instance, it will lend 30% of the value of inventory under Formula l). In addition,

inventory is a current asset and is therefore included in the calculation of the working capital ratio.

Equipment, however, is a long-term asset, so it is excluded from the calculation of the working capital

ratio.

Capital assets

A gain of $90,000 from an insurance claim was recorded. The asset appears to have been fully

depreciated since a gain was recorded for the total amount to be received from the insurance company. If

the asset was not fully depreciated, then the net book value of the asset should be written off, which

would reduce the amount of the gain to be recorded. If you intend to repair the asset you should either

accrue an amount payable for the repair or reduce the receivable by $90,000. Reducing the value of the

receivables will reduce the amount of financing available.



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A sum of $15,800 was spent to make the earth mover operational. This amount should be capitalized to

equipment since the expenditure will have future benefit. This will result in an increase in the amount of

financing available.

The cost of cleaning and painting the shop should be considered a regular maintenance expense and

cannot be capitalized.

The Eckleforth site has a remaining life of two years and is unlikely to be offered to the City of Eckleforth

in the current year. Therefore, the Eckleforth site should not be classified as a current asset.

Landfill sites

It was necessary to decide whether landfill sites should be classified as land and included in the

calculation of the financing. The landfill sites should be recorded at the lower of the net recoverable

amount and the net carrying value. EML’s plan to offer the Eckleforth site to the City of Eckleforth

suggests that landfill sites may have no market value and may even have a negative value since the cost of

cleaning up the Eckleforth site is higher than its net book value. We have assumed that the landfill sites

would not be included as land. In the case of the Eckleforth site, even if it were included, its value would

be nil.

Funds due to shareholder

Our biggest concern was how to classify the amount owed to you by EML. You have made it very clear

that you want EML to repay the loan, which means that this debt is current for the company, i.e., will be

paid within one year. If this amount is considered current, then the working capital ratio will be lower

than 1 and no financing will be available. In order to obtain the financing you need, repayment of the

amount owed to you will have to be postponed until the following year. The bank will want a written

commitment from you stating that you will not ask for the repayment of the debt within a year. We have

assumed that you will agree to this condition in order to obtain the financing.

Other

Income taxes payable are your personal expenses and should not be included on EML’s balance sheet.

This elimination results in a more favourable working capital ratio.

The current portion of long-term debt is a current liability; however, the terms of S&L’s offer specify that

the working capital ratio excludes any financing from the bank. Accordingly, we have excluded this

amount for the purpose of determining the working capital ratio.

Calculation of financing available

We have restated the balance sheet in accordance with the preceding analysis, as follows:

As stated in unaudited balance

sheet, June 30, 2018 Revised under the given

assumptions Cash $ 84,000 $ 84,000

Accounts receivable 585,000 410,000

Non-current assets held for resale 0 60,000

Spare parts inventory 907,000 477,000

Land, building, and equipment 2,759,000 2,705,100



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As noted earlier, these numbers are preliminary since an audit has not been performed and the numbers

could change after an audit is performed. Furthermore, you may disagree with some of the assumptions

we have made, and further information is needed to confirm some of the assumptions.

Financing available

On the basis of the revised balance sheet, the working-capital ratio is 1.60:1 (the current assets being

$554,000 and current liabilities $347,000). We have not included taxes payable or the current portion of

long-term debt in the calculation of the ratio. Even with the revised numbers, including the amount due to

you from EML would reduce the ratio to less than 1.00.

Formula 2 should be used to calculate the amount of financing available (000s).

- 80% × AR (410) = $ 328

- 70% × capital assets (477 + 2,705.1) = 2,227

- Total available $2,555

With financing of this amount, EML will be able to repay the loan to the Dominion Royal Bank but will

not have enough to repay the loan due to you.

The actual amount that S&L Bank is willing to lend EML will depend on the Bank’s own definitions of

assets and liabilities. The Bank may disagree with the assumptions and policies we have used in defining

assets and liabilities. If the bank’s definitions differ from ours, its conclusion will differ from ours.

Sensitivity analysis

Since the numbers may change, we have made calculations using some changed assumptions. The first

scenario includes the $90,000 from the insurance claim, since EML might not repair the truck. The

second includes $290,000 for the Banbury site but excludes the Eckleforth site since it has no value.

1. If we include the amount of $90,000 receivable from the insurance company, the amount of financing

you can expect to receive will increase by $63,000 ($90,000 × 70%) under Formula 1 and by $72,000

($90,000 × 80%) under Formula 2. Under neither formula will the amount received from the bank

cover the amount owed to you.

2. If the Banbury landfill site is included in the calculation, the loan would increase by $145,000

($290,000 × 50%) or $203,000 ($290,000 × 70%). This scenario is very unlikely to materialize. No

provision for site restoration costs has been made for this site, and the bank would probably question

the value assigned to the site.

Before you begin negotiating a loan agreement with S&L, you should consider whether a lower interest

rate is more beneficial to you. The existing loan is long term and is for 10 years. What S&L is offering

you is partly a short-term loan and partly a long-term loan. S&L’s long-term loan could be recalled as

soon as the next set of financial statements is available. The S&L Bank has the right to recall the loan

based on the audited financial statements. You could be put in the same situation next year, i.e., looking

for financing again.



11-43

Case 3: Lisa’s Insurance Services Ltd. Suggested solution:

Analysis and recommendations

1. The liability to the vendor will be recorded at $17,589, determined as set out below. The accrued

interest of $682 will be reported as a current liability, while the principal portion of $16,907 will be

reported as long-term debt.

Present value of the note at origination using a BAII PLUS financial calculator: 3 N; 8 I/Y; 20000

FV; 400* PMT; CPT PV PV = –16,907 rounded. The computer asset will be recorded at $16,907.

*$20,000 × 2% = $400

Accrued interest to December 31, 2017 = $16,907 × 8% × 184 / 365 = $682 (rounded)

The liability to be recorded = $16,907 + $682 = $17,589.

2. The key word in the facts given in the question is ―possible.‖ As legal counsel advises that the outcome

is possible, rather than probable, a liability is not provided for. Rather, the nature and details of the

lawsuit should be disclosed in the notes to the financial statements. Had counsel determined the

outcome to be probable, an obligation would be provided for using present value techniques.

3. IFRS 9 paragraph 5.1.1 requires that the guarantee be initially reported at its fair value. The fair value

considers the amount of the guarantee, the prevailing discount (interest) rate, and the probability of

default. Subsequently the guarantee is measured at the higher of the best estimate to settle and the

remaining provision recorded in the financial statements. IFRS 7 requires that LISL disclose the

nature of the guarantee including the maximum risk exposure ($100,000).

4. Because LISL was granted the waiver before year-end, the term loan with the bank may be reported

as a non-current liability. Had the waiver been received after year-end but before the statements are

issued, the liability must be presented as a current obligation with the details of the grace period

disclosed.

Case 4: Current liabilities and contingencies. Suggested solution:

To: Mr. Robert Watt, CEO

From: Ranjit Sidhu, CFO

Date: February 15, 2017

Re: Contemplated changes to the company’s warranty and reward programs

As requested, I have analyzed the changes that you have been considering to the company’s

warranty and reward programs. My findings follow:

Warranties: Revenues from the warranties sold separately are deferred and recognized over the

three years of coverage. If the warranties are bundled with the product there will be two effects.

The full price of the warranty will be recognized as revenue in the year of the sale. These

revenues will be partially offset by the expected cost of servicing the warranty during the

coverage period; however, this provision will be lower than before as it no longer includes

unearned profits.

We currently sell warranties covering about 70% of our products. In a bundled sale, this will

increase to 100%. Assuming that our sales levels of appliances remain unchanged—which, as

discussed below, is by no means certain—then revenues and profit will increase

incrementally from the (bundled) sale of the additional warranties.



11-44

The net effect on the income statements will be that the net profits from the warranties will be

recognized in the year the warranties are sold, rather than over the three-year warranty period.

The additional after-tax profit will flow through to retained earnings.

Reward program: Under the current program, because the rewards are supplied by our

company, the revenues from sales to the retailers are considered ―multiple deliverables‖. Thus,

we estimate the value of the future benefits the retailers are entitled to, and this portion of the

revenue is deferred to the following year. If the program is changed such that the rewards will be

provided by a third party, then in the year of the sale, the full amount of the sale will be

recognized as revenue at the time the appliances are delivered to the retailer. This increase will

be offset, however, as the cost of the rewards the retailers are entitled must now be expensed in

the year of sale. The change will immediately impact the financial statements.

All revenue will be realized at time of sale, rather than deferring a portion to the following year,

these incremental revenues will be offset by the expense for the cost of the reward program. Net

income and hence retained earnings will be largely unaffected. The contemplated change will

also impact the balance sheet. Currently a provision for unearned revenues is established for the

expected future benefits to be provided to the retailer. Under the new approach a liability will not

normally be recorded. Rather, the cost of the program will be remitted to Rewards Plus on an

ongoing basis, reducing our cash position.

As the analysis above shows, under both proposed changes all the revenue is recognized up

front. Thus, if these changes are implemented next year, in this transition year, gross revenues

will increase. In the case of the warranties it is due to the combination of the acceleration of

earnings on the warranty product and higher revenue for the additional warranty sales, and in the

case of the rewards program it is because the reward portion of the revenues will no longer be

deferred to the following year.

The foregoing analysis only examines the accounting effects of the proposed changes. These

changes can have unintended economic consequences that warrant careful consideration. For

example, a change in the way warranties are sold may negatively impact appliance sales as the

customer will no longer be able to choose whether or not to purchase a warranty. Similarly,

retailers may not be receptive to the proposed amendments to the reward program as they may

prefer cash discounts to rewards of products and/or services that they may not need. Moreover,

the change to an external rewards supplier will initially negatively impact our cash position.

Lastly, for the most part the apparent increase in revenues does not reflect real growth, but rather

the effect of changes to the timing of revenue recognition. The increase in sales (and in profits) is

largely a one-time event in the transition year and is not sustainable on an ongoing basis.

I will be pleased to discuss this with you at your convenience.

Copyright © 2017 Pearson Canada Inc. 4

CHAPTER 11 Current Liabilities and Contingencies

CPA COMPENTENCIES ADDRESSED IN THIS CHAPTER: 1.1.2 Evaluate the appropriateness of the basis of financial accounting (Level B) 1.1.4 Explains implications of current trends and emerging issues in financial reporting a. emerging trends in accounting standards and recent updates 1.2.1 Develops or evaluates appropriate accounting policies and procedures (Level B) 1.2.2 Evaluates treatment for routine transactions (Level A) g. Provisions, contingencies, and current liabilities k. Financial instruments p. Foreign currency transactions 1.3.1 Prepares financial statements (Level A) 1.3.2 Prepares routine financial statement note disclosure (Level B) 1.4.1 Analyzes complex financial statement note disclosure (Level C)

LEARNING OBJECTIVES 11-1. Describe the nature of liabilities and differentiate between financial and non-financial

liabilities. 11-2. Describe the nature of current liabilities and account for common current liabilities

including provisions. 11-3. Describe the nature of contingent assets and liabilities and account for these items. 11-4. Describe the nature of commitments and guarantees and apply accrual accounting to

them.

OVERALL APPROACH This chapter serves two roles. The first is an overview of liabilities, and the second is detailed coverage of current liabilities, contingencies, and commitments. Chapter 12 then deals with non-current financial liabilities, while later chapters cover other more specialized topics that partially involve liabilities (complex financial instruments, accounting for income taxes, pensions, leases).

KEY POINTS Overview of liabilities: Section B (pp. 502-505) discusses the definition, recognition, classification, and measurement of liabilities. Here, classification precedes measurement because the method of measurement depends on the classification of the particular liability.

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The definition of a liability was first introduced in Chapter 2 as part of the conceptual framework. As it will have been a considerable length of time since students covered Chapter 2, it is important to review the three essential characteristics of a liability (a present obligation, arising from past events, and future outflow of economic benefits). It is useful to compare these characteristics with those that define an asset.

The recognition of liabilities, consistent with other financial statement elements, depends on the ability to reliably measure the liability. Reliable measurement does not require certainty—liabilities can be recognized even if they are uncertain in amount or timing.

It is necessary to distinguish financial from non-financial liabilities because the measurement bases may differ. Financial liabilities are a type of financial instrument. IFRS requires that some financial liabilities be measured at their fair value rather than amortized cost.

As previously discussed in Chapter 3, the balance sheet (statement of financial position) usually uses the current / non-current presentation. Presentation by liquidity is rare (e.g., for financial institutions) and outside of what students would be expected to know and apply in intermediate accounting. Those liabilities maturing within one year of the balance sheet date are current; any fair value through profit or loss (FVPL) financial liabilities would also be presented as current.

The measurement of liabilities depends on their classification. Financial liabilities at FVPL – measure initially and subsequently at fair value. As

noted above, these liabilities are outside of what students are expected to know, so they not covered in further detail.

Other financial liabilities – measure initially at fair value minus transaction costs; subsequent measurement at amortized cost using the effective interest rate method. Covered in more detail in Chapter 12 and also discussed in Chapter 7.

Non-financial liabilities – measure according to their nature. When the difference between the present value of future cash flows and the nominal value is material, use present value to measure the liability. Additional coverage follows in the next section.

Current liabilities: Section C covers a range of current liabilities. The eight examples are not comprehensive but do capture the most commonly encountered items.

1. Trade payables should be familiar to students. Two issues require further discussion:

a. The concept of “cut off”. Cut off refers to ensuring that all obligations entered into during a reporting period are properly recognized in the correct period. Cut off is an important concept and is pervasive across all elements of the financial statements. Incorrect cut off can cause errors or omissions in reporting. Some examples are:

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Sales invoices recognized at year end but goods do not ship until the beginning of the next fiscal period. This will overstate sales and accounts receivable.

Failure to accrue expenses in the current period that have been incurred but not yet paid. This will understate expenses and accounts payable.

Failure to record purchases for goods received. This will understate accounts payable and inventory.

b. The difference between the gross and net methods of recording cash discounts. Although the net method is more conceptually sound, the gross method is more commonly used. Businesses can justify using the gross method based on the cost-benefit and materiality constraints. Some students may recall that the mirror image of this issue was covered in Chapter 5 on accounts receivable. Also similar to accounts receivable is the fact that trade payables are not usually discounted for the time value of money due to the relatively high volume of transactions and the low amount of interest that would be imputed.

2. Common non-trade payables are other short term obligations that are indirectly related to the normal business activities of an organization. These include, but are not limited to: sales taxes payable, income taxes payable, dividends payable and royalty fees payable. Some specific issues to note about these payables follow.

a. Sales tax liabilities are classified as non-financial liabilities because they are legislated and not contractual. There is a risk that discussion here can become complicated because of the diversity of sales tax regimes in different provinces, and the technical details of the tax rules. It is therefore important to focus on the accounting for these taxes, not the specific tax rules. The important point to note is that an enterprise merely acts as an agent of the government, so that any taxes charged on sales made to customers are the property of the government and payable to it. On the purchases side, GST/HST paid on inputs are refundable to the enterprise and are therefore recorded as GST/HST recoverable. In contrast, PST paid is generally not recoverable. (PST is not payable on goods purchased for resale, while PST on goods not for resale becomes part of the cost of the items.) Page 508 discusses some of the complexities that can arise when accounting for sales taxes.

b. Income taxes payable are classified as non-financial liabilities also. Income taxes will be covered in more detail in Chapter 16.

c. Dividends payable occur when cash dividends are declared but not yet paid. The payable will normally be classified as current and the obligation only arises when dividends are declared, no amounts are accrued for cumulative preferred dividends in arrears. Stock dividends do not give rise to a liability and can be revoked by the board of directors before issuance.

d. Royalty fees arise from contractual obligations in a franchise agreement; therefore, unpaid royalty fees owing represent a current liability.

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3. A note payable is distinct from trade payable by whether it is supported by a written promise to pay (i.e., a promissory note). Because of the lower frequency of these transactions and related record keeping costs, and the larger amount of interest that is typically expected, we generally record notes payable at discounted present value. However, enterprises often ignore immaterial amounts of interest on notes with very short durations (90 days or less). Interest bearing notes are initially recognized at the fair value of the consideration received and non interest bearing notes are measured at discounted present value. This section keeps the discussion of discounting at a simple level by assuming that the stated rate on the note is the same as the market rate. Differences in rates are left to the coverage of long-term debt in Chapter 12.

4. Credit (loan) facilities (e.g., line of credit) are commonly used to manage seasonal fluctuations in cash flows and balances. Recording the amount owed is straight-forward; the issue here relates to the disclosures required to detail the credit facilities available to the enterprise.

5. Warranties can be either a part of a product, or sold separately. The latter was covered in Chapter 4 on revenue recognition, so the focus here is on the former (manufacturers’ warranties). Warranties are a type of contingency, which is discussed more thoroughly later in the chapter, because the outflow of resources depends on the outcome of future events (i.e., the product malfunctioning during the warranty period). Because the likelihood of loss is probable, and the amount can be reasonably estimated, IFRS treats warranty costs as a type of provision. The amount of the provision requires the use of expected value techniques (e.g., weighted average). Where the warranty obligations are deemed immaterial, the costs can be expensed as incurred.

6. Deferred revenue is a liability that was previously covered in Chapter 4 on revenue recognition. If the deferred revenue relates to a simple promise to deliver goods or services at a later date, then the accounting is fairly straight-forward. However, there are more complex examples of deferred revenue, such as frequent flyer miles, discussed next.

7. Customer incentives. Many companies offer various incentives to customers to purchase their products and services. These incentives may be in the form of customer loyalty programs, premiums, coupons, and rebates.

a. Customer loyalty programs give rise to deferred revenue. These loyalty programs involve the initial delivery of the primary product, plus a promise of future goods or services. Depending on who provides the future goods or services, the accounting differs. If a third party supplier is involved, than the reporting entity simply records an expense for the amount it needs to pay the third party for the loyalty points. If the reporting entity itself supplies the rewards, then it must treat the transaction as having multiple deliverables: those for the initial sale and those for the future delivery of rewards.

b. Premiums are goods and services that can be purchased by customers by exchanging “points” earned from past purchases. Discount vouchers (coupons)

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entitle a customer to a discount off the retail price. Rebates require a customer to apply for a refund on a retail purchase. Premiums are accounted for similar to customer loyalty programs in that the initial sales represent a multiple deliverable. Measurement of the liability for the premium references the value to the customer, not the cost to the entity. Measurement of coupon and rebate liabilities is similar to the accounting for warranties. Where management’s initial estimates prove incorrect, changes to the estimates are treated prospectively.

8. Other current liabilities. There are many other types of current liabilities, including certain obligations to employees. Some liabilities that warrant special consideration given their unique characteristics are:

a. Obligations denominated in foreign currencies should be translated into the functional currency (usually Canadian Dollars) at the transaction date, and then revalued at the endo of a period using the exchange rate at that time. Any resulting gain or loss flows through income.

b. Maturing debt to be refinanced and non-current debt in default create some interesting reporting issues. Exhibit 11-16 (p. 523) summarizes the treatments. The reporting outcomes depend on whether the enterprise obtains the renewal or grace period prior to (i) the year-end or (ii) the financial statement approval date.

Contingencies: Section D’s coverage of contingencies takes a more fundamental approach to the topic than a simple interpretation of the standards. The reason is that the standards in IFRS relating to contingencies is convoluted and uses terminology that differs plain English and from that used in ASPE. IFRS defines contingent assets and liabilities, while ASPE defines contingent gains and losses. Confusingly, IFRS defines a contingent asset or liability based on the accounting outcome rather than its nature; contingent assets and liabilities are essentially those that are not recognized as assets or liabilities, but which require disclosure as a possible asset or liability.

To avoid the conflicting technical wording in the two sets of standards, the chapter uses the plain-English terms “contingencies,” “contingent outflows,” and “contingent inflows.” For each of contingent outflows and contingent inflows, the two criteria of likelihood (remote, possible, probable) and measurability can then be applied. The result for outflows is the 2 × 3 matrix in Exhibit 11-18 (p. 525). The result for inflows is simpler: recognize if virtually certain and measurable; disclose as contingent asset if probable.

Another significant difference between IFRS and ASPE are the terms used for the upper category of likelihood: IFRS uses “probable” meaning >50% while ASPE uses “likely,” which is usually interpreted to mean >70%.

Chapter 11


Exhibit 11-19 (p. 526) provides accounting treatments for contingent outflows. It is important to note that uncertainty exists when estimating contingent liabilities and many other types of liabilities.

Commitments and guarantees: A commitment requires an enterprise to do something in the future. We can think of a guarantee as a contingent commitment, since a future adverse event must occur before action is required from the enterprise providing the guarantee. Commitments and guarantees generally require disclosure. A commitment is not recognized as a liability because it is a mutually unexecuted contract (or “executory contract”), unless the commitment involves an onerous contract. An onerous contract is one in which the unavoidable costs of fulfilling the contract exceed the benefits expected to be received (i.e., it will result in negative net outflows from the enterprise). An enterprise with an onerous contract must recognize the expected loss.

USE OF END-OF-CHAPTER PROBLEMS AND CASES In addition to lectures, discussion of some of the end-of-chapter problems and cases will help students apply the concepts. The following table identifies the suggested problems and cases that could be used in class, as well as other suggested problems for homework assignments. (Depending on the time allocation between lectures and examples, it may not be feasible to cover all of the suggested items.)

Table 11-1: Summary of learning objectives, chapter content, and suggested problems and cases

L.O. number Learning objective Pages

Suggestions for in-class discussion

Suggestions for

assignments 11-1. Describe the nature of liabilities

and differentiate between financial and non-financial liabilities.

502-505 P11-2 P11-3

P11-5

11-2. Describe the nature of current liabilities and account for common current liabilities including provisions.

505-523 P11-6 P11-18

P11-8 P11-15 P11-38

11-3. Describe the nature of contingent assets and liabilities and account for these items.

524-530 P11-38 P11-41

11-4. Describe the nature of commitments and guarantees and apply accrual accounting to them.

530-531 P11-48 P11-50

-- Integrative Case 1 Cool Look

Limited

Case 2 Earth

Movers Ltd.

Chapter 11


Cool Look Limited involves a (simulated) company that will potentially breach bank covenants and as a result it would need to repay a significant bank loan. The student, playing the role of the auditor, must apply professional judgment to conclude how various transactions and accounts should be reflected in the financial statements. The accounting potentially affects whether the company is able to meet the bank covenants.

Case 2 involves another simulated company that has to procure significant refinancing to continue operations. The financial statements had not been previously audited, but audited statements are a condition of the new financing. The new financing agreement also contains a number of requirements based on financial statement balances and ratios. Students must apply professional judgment to determine the appropriate treatment of various accounting issues and the implications for the financial statement balances and ratios.

Lo/Fisher, Intermediate Accounting Vol.2Lo/Fisher, Intermediate Accounting Vol.2Lo/Fisher, Intermediate Accounting Vol.2


Chapter 11

Current Liabilities and Contingencies

11- 1


11- 2

L.O. 11-1. Describe the nature of liabilities and differentiate between financial and non-financial liabilities.

L.O. 11-2. Describe the nature of current liabilities and account for common current liabilities including provisions.

L.O. 11-3. Describe the nature of contingent assets and liabilities and account for these items.

L.O. 11-4. Describe the nature of commitments and guarantees and apply accrual accounting to them.

LEARNING OBJECTIVES



11- 3

1.1.2 Evaluates the appropriateness of the basis of financial accounting (Level B)

1.1.4 Explains implications of current trends and emerging issues in financial reporting

a. emerging trends in accounting standards and recent updates

1.2.1 Develops or evaluates appropriate accounting policies and procedures (Level B)

CPA competencies addressed in this chapter



11- 4

1.2.2 Evaluates treatment for routine transactions (Level A)

g. Provisions, contingencies, and current liabilities

k. Financial instruments

p. Foreign currency transactions

1.3.1 Prepares financial statements (Level A)

1.3.2 Prepares routine financial statement note disclosure (Level B)

1.4.1 Analyzes complex financial statement note disclosure (Level C)

CPA Competencies addressed in this chapter (Continued)



A. INTRODUCTION

• Liabilities are obligations to provide cash /other assets or services to other parties

• Determining the amount to be paid to settle an obligation has its challenges

• Many factors can affect the value of the indebtedness

• Creditors, investors, suppliers, others interested in the amount of liabilities reported

Copyright © 2017 Pearson Canada Inc.11- 5


B. DEFINITION, CLASSIFICATION, AND MEASUREMENT OF LIABILITIES (L.O. 11-1)

• Financial statements convey information between preparers and users

• IFRS defines key terms used in preparing financial statements

• Defining key terms enhances the quality of what is being communicated

• Essential to understand key liabilities term



1. Liabilities defined

• A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.



2. Recognition

To be included in financial statements:

• Precise amount of obligation not required

• A reliable estimate is required and should normally be available

• Liabilities that are uncertain in amount and/or timing are provisions (e.g. warranty costs)



3. Financial and non-financial liabilities

• Financial liability - a contractual obligation to deliver cash or other financial assets to another party

• Non-financial liability – meets liability criteria but is not contractual.– Typically settled through the delivery of goods or provision of

services (unearned revenues, warranty liabilities)

• Liabilities established by legislation (such as income taxes payable) are non-financial liabilities -not contractual in nature



Financial liabilities - Initially measured at fair value- Subsequently measured at amortized cost - If held for trading, such as derivatives,

then measured at fair value

Non-financial liabilities- measured using best estimate at balance

sheet date

Financial and non-financial liabilities (continued)



Why distinguish between financial and non-financial liabilities?

Some financial liabilities measured at fair value vs. amortized cost

Financial and non-financial liabilities (Continued)



4. Current versus non-current liabilities

• Current – expected to be settled within one year of the balance sheet date or normal operating cycle

• Held-for-trading (if any) is presented as current

• Present current and non-current separately



5. Measurement

Measurement normally based on nature of obligation

•Held for trading – initially and subsequently measure at fair value

•Other Financial – initially at fair value less transaction costs

– subsequent to acquisition at amortized cost

•Non-financial – depends on nature; may be best estimate or based on amount initially received



Check Point CP 11-2

• What are the three criteria of a liability

• Also see Problem 11-5



C. CURRENT LIABILITIES (L.O. 11-2)

Current liabilities

Financial guarantees

Provisions


Rest of chapter reviews three broad firm obligations. Common current liabilities are first discussed


1. Trade Payables (Accounts Payable)

• Normally for goods and services received/used

• Accruals included for invoices “in transit”

• Part of normal course of business

• Not supported by a written promise to pay

• Reported in one total

• Amount known with high degree of certainty

• Consider Cut-off and Gross vs. Net methods



Gross vs. Net Method of RecordingTrade Payables



CHECKPOINT: CP 11-3

From a theoretical perspective, should the grossmethod or net method be use to account for tradepayables?



2: Common Non-trade Payables

• Do not arise from ordering goods / services

• Aggregation and disclosure vary among firms

• Common ones include:

– Sales taxes payable

– Income taxes payable

– Dividends payable

– Royalty fees payable



a: Sales Taxes Payable

• Total sales taxes depends on province

• Federal Goods and Services Tax (GST)

• Provincial sales tax (PST)

• Or a combination, Harmonized Sales Tax (HST)

• See Exhibit 11-2 for rates at January 1, 2012



Sales Taxes Payable (continued)

• PST on internal use purchases generally not recoverable

• GST/PST/HST Payable

– Collected on eligible sales

• GST/PST/HST Recoverable

– Paid on eligible purchases

• Remit net amounts to appropriate authorities

• See Exhibits 11-4 and 11-5



b: Income Taxes Payable

• Taxes on taxable income in chapter 16

• Amount owing is normally a current liability

• Withholdings from employees of federal and provincial income taxes also reported as current liabilities



c: Dividends Payable

• Cash Dividends– Become a liability when declared

– Classified as current liability

• Stock Dividends– Not a liability even when declared

– No future outflows of economic resources involved

– Recorded through retained earnings and other equity account(s)

• Dividends in Arrears on Preferred Shares– Undeclared cumulative preferred dividends not

recognized as a liability. No declaration, no liability.

– Require note disclosure



d: Royalty Fees Payable

• Most franchise agreements require franchisees to pay royalties to franchisors (such as Tim Horton’s) based on sales

• Oil and gas companies pay royalties to governments

• Publishing companies pay royalties to authors

• Unpaid royalties are current liabilities



CHECKPOINT: CP 11-4

Can a company report its HST receivable andpayable as a net amount on the balance sheet? Whyor why not?



3. Notes payable

• Supported with a written promise to pay

• Used in credits over extended periods

• Can be current, non-current, or combination

• Can be interest bearing – measured at fair value (Exhibits 11-6; 11-8d)

• Can be non-interest bearing – normally estimated using valuation techniques, such as discounted cash flows



CHECKPOINT: CP 11-5

Why are short-term trade payables normally valued at the original invoice amount rather than the fair value?



4. Credit (Loan) Facilities

• Permits borrowing on an ongoing basis

– Referred to as a line of credit

• Limit and other terms and conditions of credit agreement is documented

• Most credit facilities are due on demand

• “Due on demand” makes it a current liability

• Disclosure required in the notes



• Warranty - a guarantee that products will be free from defects for a specified period, agreeing to fix or replace them if they are faulty

• Two types

– Manufacturers (included in product price)

– Sold separately (manufacturer or another party)

5. Warranties



Warranty Embedded in Product

• Results in a provision and an expense (year of sale)

• Measured using expected value techniques

• Subsequent claims charged to the provision

– Offset to inventory, labour or other expenses to satisfy the claim

• Can extend beyond a year, but all charged in sale year

• Liability may be current or non-current

Warranties (Continued)



Warranty Embedded in Sales Price

At Time of sale:

No Entry for warranty expense

Actual Warranty Costs Incurred Dr. Warranty Expense xxx

Cr. Cash/Inventory/Payroll xxx

Year-end Adjusting entry(to ensure proper provision for year)Dr. Warranty Expense xxx

Cr. Provision for Warranty Payable xxx

At Time of sale:Dr. Warranty expense xxx

Cr. Provision for Warranty Payable xxx

Actual Warranty Costs IncurredDr. Provision for Warranty Payable xxx


Year-end Adjusting entry

No Entry (unless to cater for new information)

A: Expense as Incurred and Adjust at year-end

B: Provision at time of sale

Same expense for year and same liability at year-end under either approach



At time of sale:

Dr. Cash xxx

Cr. Sales Revenue xxx

Cr. Unearned Warranty Revenue xxx

As time passes (Expense incurred)

Dr. Warranty Expense xxx


&

Dr. Unearned Warranty Revenue xxx

Cr. Warranty Revenue xxx

Revenue determined based on expense incurred or time elapsed

Warranty Sold Separately



CHECKPOINT CP:11-6

What technique is used to estimate the required provision for warranties?



• Arise from collection of assets not yet earned

• Also called: Unearned revenue; Deposits

• May arise from customer loyalty programs

• Can have current/noncurrent components

• When “earned” unearned amount becomes revenue

6. Deferred Revenues



When cash is received:Dr. Cash xxx

Cr. Deferred Revenue xxx

When revenue is earned (service / good provided)

Dr. Deferred Revenue xxx

Cr. Revenue xxx

6. Deferred Revenues (continued)



• Customer incentives: promote product or brand loyalty and repeated patronage of goods and services designed to increase sales

• Include:

- Customer loyalty programs

- Discount vouchers (coupons)

- Rebates

7. Customer Incentives



• Examples:

1. Point awards redeemed for merchandise

2. Frequent flyers miles exchanged for future flights or other products

a. Customer Loyalty Programs



• Loyalty programs share two essential commonalities:

1. Grant material rights for future benefits for free or at a discount, and

2. Underline transaction involves multiple deliveries, including in the future

1. Fulfilling the terms of the current sales (e.g., flight ticket)

2. Meeting the loyalty program commitment (e.g., free miles converted into a flight ticket/product)

Customer Loyalty Programs (Continued)



• Measurement of the award part of the transaction is complex - Governed by IFRS 15, Revenue from Contracts with Customers

• Factors to consider in determining the liability amount

1. The proportion of the transaction price allocated to the future obligation

2. If stand-alone price is not directly observable, an estimate must be made. Consider factors such as the rate of redemption




Three primary methods of offering awards:

1. Rewards supplied by the company itself

2. Rewards supplied by a third party

3. Rewards by choice – either provided by the company itself or by a third party




• Third party awards: Recognize expense based on cost to purchase awards for the customers

• At time of saleDr. Cash /Accounts Receivable xxx

Cr. Sales Revenue xxx

&

Dr. Loyalty Awards Expense xxx

Cr. Liability for Loyalty Awards xxx

– Reduce liability as awards are used up

Customer Loyalty Programs (continued)



Awards by Entity: two distinct components

– revenue recognized when each component is earned

– the reward segment is earned when the customer redeems the award

At time of sale:Dr. Cash/Accounts Receivable xxx

Cr. Regular Revenue xxx

Cr Unearned Revenue, Awards xxx

When awards are redeemed

Dr. Unearned Awards Revenue xxx

Cr. Awards Revenue xxx

Customer Loyalty Programs (continued)

Copyright © 2017 Pearson Canada Inc. 11- 42


• Entitles consumer to a discounted price on future purchases

• Accounting treatment is similar to that when awards for loyalty programs are supplied by the entity

b. Discount Vouchers (Coupons)



• A proof of purchase sent to manufacturer who sends customer agreed-upon amount

• The sales revenue recognized must be adjusted downward to reflect the expected rate of rebate redemption against a liability

c. Rebates



Accounting for coupons and rebates similar to accounting for warranties embedded in the product

(Subsection C-5 above)

Change in management’s estimate for redemption is accounted for prospectively

Premiums, Coupons and Rebates (continued)



What are the three common ways of offering loyalty awards?

CHECKPOINT: CP 11-8



• Those requiring special mention discussed in the following slides

8. Other Current Liabilities



a: Obligations denominated in another currency

– Translate into functional currency with exchange rate on transaction date

– Translate obligation at period-end with exchange rate at period’s end.

– Recognize gain or loss on translation in income

Other Current Liabilities (continued)



b: Maturing debt to be refinanced

– If refinancing agreement not in place by balance sheet date – classify as a current liability

– Disclose refinancing arrangements made subsequent to balance sheet date but before issue date




c: Non-current debt in default

– Treat as a current liability

– Classify as non-current if, before period-end, lender provides a grace period longer than 12 months from balance sheet date

– If lender extends terms before statements are issued present as current and disclose grace period.




How are liabilities denominated in foreign currencies accounted for at the transaction date? At period end(s)?

CHECKPOINT: CP-9



D. CONTINGENCIES (L.O. 11-3)

Contingency - an existing condition that depends on the outcome of one or more future events

• Probability of future outcomes crucial to accounting treatment of contingencies

• Three ranges of probabilities

– Probable

– Remote

– Possible



The Probability Continuum



Contingencies (continued)

• Issue: are contingent amounts measurable with sufficient reliability?

• IAS 37 paragraphs 25–26 assert that only in extremely rare cases will the entity be unable to determine a range of possible outcomes used to estimate the extent of the obligation



1. Contingencies Involving Potential Outflows

• Results in one of three outcomes:

a. Recognition of a provision

b. Disclose as a contingent liability in notes to the financial statements

c. No action required



Contingencies Involving Potential Outflows (continued)



• Provision required when outflow is

i. probable , and

ii. measurable

in that case, expense and liability are accrued

(See Exhibit 11-19a)

• Range of outcomes? Use expected value techniques (weighted average)

a. Recognition of a Provision



b. Disclosure as a Potential Liability

When:

i. contingent outflow is not probable, or

ii. future outflows cannot be measured reliably,

then;

Disclose a contingent liability in the notes.

(Cells 2, 5, and 4 of Exhibit. 11-18)

(Also see Exhibit 11-19b)



c. No Action Required

When:

i. Probability of contingent outflow is remote,

then;

neither recognition nor disclosure warranted.

(Cells 3, 6 of Exhibit. 11-18)

(Also see Exhibit 11-19a)



Illustrations of accounting for contingencies

Scenario 1




Scenario 3



2. Contingencies Involving Potential Inflows

• Stronger evidence required to recognize contingent inflows (prudence, conservatism). Results in one of three outcomes:

a. Recognition as an asset (> 95% )

b. Disclose as a contingent asset

c. No action required



Contingencies Involving Potential Inflows (continued)

a. Recognition as an asset

• Only permitted if inflow is virtually certain

(in practice > 95% probable.)

• Contrasts recognition of contingent outflow as a provision when probable (> 50% )



b. Disclosure as a Contingent Asset

When a contingent inflow is probable (> 50%), IFRS recommends disclosing a contingent asset, defined as:

• a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events



c. No Action Required

When a contingent inflow is not probable (< 50%), neither recognition nor disclosure is warranted.



In the context of accounting for contingencies under IFRS, what do the terms probable, possible, and remotemean?

CHECKPOINT: CP- 10



When is a provision recognised for a contingency involving potential outflows?

CHECKPOINT: CP-11



3. Treatment of Contingencies Under ASPE

• Inflows and outflows treated differently (as in IFRS)

• ASPE uses a different range of probabilities

• Uses “likely” (70%) vs. IFRS’ “probable” (>50%)

• Income statement focused: (contingent gains/losses) vs. IFRS’ contingent assets/liabilities (balance sheet).

• When amounts in a range are equally possible, ASPE recognizes lower amount and discloses maximum; IFRS uses expected value in the range.



E. COMMITMENTS AND GUARANTEES (L.O. 11-4)

1. Commitments

• Require companies to do things in the future

• Users interested in these future obligations

• Required to disclosure certain commitments in notes (e.g. commitment to buy property plant and equipment)

• Other commitments recognized on the balance sheet

– Onerous contracts

See Exhibit 11-22



2. Guarantees

• Must be recognized at their fair value;

• Details must be disclosed



F. PRESENTATION AND DISCLOSURE

• Disclosure requirements are extensive

• Disclosure requirements include the following:

– IAS 1 Presentation of Financial Statements

– IAS 32 Financial Instruments Presentation

– IAS 37 Provisions, Contingent Assets/Liabilities

– IFRS 7 Financial Instruments: Disclosures

– IFRS 9 Financial Instruments



G. SUBSTANTIVE DIFFERENCES BETWEEN RELEVANT IFRS AND ASPE



H. STANDARDS IN TRANSITION

• IASB in the midst of replacing IAS 39, Financial Instruments: Recognition and Measurement with IFRS 9, Financial Instruments. Planned adoption date is January 1, 2015. Deals with:

– classification and measurement of financial assets and liabilities

– Impairment methodology

– Hedge Accounting



I. SUMMARY

L.O. 11-1. Describe the nature of liabilities and differentiate between financial and non-financial liabilities.

L.O. 11-2. Describe the nature of current liabilities and account for common current liabilities including provisions.

L.O. 11-3. Describe the nature of contingent assets and liabilities and account for these items.

L.O. 11-4. Describe the nature of commitments and guarantees and apply accrual accounting for them.


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